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Is it time to get used to oil at $100 a barrel?

Back in 2008 I found myself experiencing a nasty dose of déjà vu that saw BusinessGreen running a monthly, and at times weekly, story on how oil prices were breaking new records.

Up through the $80 (£51) a barrel mark they went, prompting squeals of outrage from the driving public and business elite; on through the $100 mark they climbed, prompting predictions they could not go much higher; through the $140 mark they soared, before finally peaking at $147.30 a barrel in July 2008. Then the global financial crisis hit and everyone forgot about oil prices for a couple of years.

Despite protestations from the oil industry, the two-and-a-half-year lull in oil prices was primarily the result of a collapse in demand rather than any structural increase in supply, and as a result the inevitable is now happening. Demand is increasing again as the global economy gradually recovers and oil prices are rising in tandem.

Prices are now hovering around the $90 a barrel mark, with analysts polled by Bloomberg recently predicting an average price for 2011 of $87 a barrel. That is already high enough to put pressure on economic recovery, drive up the cost of transport and result in inflation for a vast number of other commodities. But more importantly, analysts know there is limited confidence in those predictions. There are plenty of well-connected and intelligent voices predicting that this year will once again see oil prices well above $100 a barrel. The implications of such high prices are wide ranging and promise both benefits and setbacks for the low-carbon economy.

The most immediate effect is that it will strengthen the case for more drilling. On an economic level oil companies will have a financial justification for increased investment in exploiting carbon-intensive and difficult-to-access reserves such as tar sands and deepwater fields. Meanwhile, on a geopolitical level, politicians argue that we need to exploit new oil fields in order to stop prices rising still further – hence today's report from the Energy and Climate Change Committee of MPs which accepts that the UK's safety rules for deepwater drilling are inadequate, but rejects any suggestion that a moratorium on new drilling is needed.

This is remarkably bad news given that several scientific studies have suggested it is highly unlikely that we can continue to extract all known oil reserves and keep temperature increases below 2°C. Moreover, increased investment by the energy industry in ever more costly oil extraction only serves to diminish available capital for alternative energy projects.

In addition, in a $100-a-barrel world it is not just oil prices that rise. During oil spikes it becomes painfully obvious how reliant the global economy is on black gold to keep it moving. Expect commodity prices to rise across the board as the impact of rising oil prices filters through, with food prices being the most high-profile victim. It is no coincidence that oil prices have hit a two-year high at the same time as the UN has warned that food prices are now in "danger territory".

For a preview of the kind of humanitarian, economic and political disaster high food prices represent, witness Caroline Spelman's speech to the Oxford farming conference yesterday in which she seriously suggested she would pursue making bans on food exports illegal. Demonstrating the kind of judgement that saw her agree to the largest cuts of any Whitehall department and the evisceration of the flood defence budget, Spelman criticised the "wrong-headed protectionism" that saw Russia and Ukraine halt grain exports in response to the shortages brought about by crippling heat waves. I can only assume that if the UK is ever faced with a serious food shortage, Spelman will continue to export staple foods in the name of the free market.

However, while rising oil, food and commodity prices throw up numerous challenges, they also present significant opportunities for the low-carbon economy. In short, an oil price that is consistently above $100 a barrel changes the dynamics of virtually every clean technology.

As energy and climate change secretary Chris Huhne eloquently explained when unveiling his proposed electricity market reforms before Christmas, the government's prediction that the shift towards lower-carbon forms of energy will add one per cent to energy bills by 2020 is based on "oil prices and corresponding gas prices of $80 a barrel which quite a lot of people thought was over-optimistic".

For "quite a lot of people", read "almost everyone". The government's official projections are based on oil prices being lower in 2020 than they are now; you'd be hard pressed to find anyone within Whitehall or otherwise who seriously believes that will happen.

As Huhne admits: "Anything above $100 a barrel and British consumers are quids in. If we go above $100 a barrel in the period up to 2020, this whole shift to energy saving and low-carbon electricity generation actually means the British consumers are making money by comparison with what would happen otherwise."

This reality applies not just to British consumers and the UK economy, but businesses around the world.

For example, Nissan's prediction that the low running costs of its Leaf electric car will make it cheaper than a conventional car over a three-year period looks ever more robust with each additional penny on petrol prices. Equally, the predicted date at which solar cells begin producing energy at grid prices will have to be brought forward if those grid prices continue to rise on the back of soaring oil and gas prices.

Oil prices will always be volatile, but business leaders need to accept we are heading for a world where oil priced in excess of $100 a barrel becomes the norm rather than the exception. Those who react quickest to this new reality, whether it is through the adoption of new green travel strategies, investment in electric vehicles or a renewed focus on energy efficiency, will inevitably prosper. Those who ignore it will be condemned to experience the déjà vu of repeatedly kicking themselves every time oil prices hit a new record high.